Business context and reporting period
Community Health Systems, Inc. (CHS) filed this unaudited Form 10-Q for the quarter ended March 31, 2011. CHS operated 130 hospitals, including one classified as held for sale, along with home care agencies and hospital management services. Comparisons are with the three months ended March 31, 2010, except balance-sheet comparisons, which are with December 31, 2010.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 or comparison |
|---|---|---|
| Net operating revenues | $3,405.3 | $3,125.5; up 9.0% |
| Income from operations | $281.0 | $275.2 |
| Operating margin | 8.3% | 8.8% |
| Income from continuing operations, before noncontrolling interests | $91.1 | $86.5; up 5.4% |
| Net income attributable to CHS | $61.3 | $70.0; down 12.4% |
| Diluted earnings per share | $0.67 | $0.75 |
| Net cash provided by operating activities | $187.5 | $299.4 |
| Cash and cash equivalents at quarter-end | $270.7 | $299.2 at December 31, 2010 |
- Operating costs and expenses were $3,124.4 million, up from $2,850.3 million. Salaries and benefits rose to 41.2% of revenue from 40.6%; bad-debt provision was 12.0% of revenue in both periods.
- Net loss from discontinued operations was $12.8 million, compared with $1.5 million. Q1 2011 included impairment and sale losses associated with a hospital held for sale and a physician clinic sale.
- Net cash used in investing was $209.4 million, including $153.9 million for property and equipment and $45.4 million for facility acquisitions. Net cash used in financing was $6.6 million.
- At March 31, total debt was approximately $8.86 billion, including current maturities; long-term debt was $8.79 billion. Net working capital was approximately $1.23 billion. The $750 million revolving facility had $81.9 million reserved for letters of credit; CHS also disclosed additional unaccessed borrowing options.
- Net interest expense was $164.2 million, versus $160.4 million. The weighted-average Credit Facility rate, excluding swaps, was 3.3%. Swaps covered approximately 89% of variable-rate debt.
Material changes versus the prior comparable period
- Revenue increased $279.8 million: $160.8 million came from hospitals operated in both periods and $119.0 million from hospitals acquired in 2010. Same-store revenue rose 5.1%.
- Consolidated admissions increased 1.4% and adjusted admissions increased 4.7%, primarily reflecting acquisitions. Same-store admissions declined 3.4%; management cited lower birth rates, fewer one-day stays, weather and service closures.
- Operating expenses excluding depreciation and amortization increased to 87.0% of revenue from 86.5%, while operating margin declined. Higher salaries and benefits, including costs associated with acquisitions and employed physicians, contributed.
- Operating cash flow fell $111.8 million year over year, principally because of payment timing and a $182.4 million adverse year-over-year change in cash flow from accounts payable, accrued liabilities and income taxes. Management cited accelerated funding of the 401(k) match in Q1 2011.
- CHS sold a physician clinic and classified a hospital as held for sale. The company also acquired physician practices, clinics and other ancillary businesses for approximately $44.7 million during the quarter.
Outlook, commentary, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said available cash, borrowing capacity and expected cash generation should support investment, acquisitions, capital expenditures and working capital needs for at least the next 12 months and into the foreseeable future.
- Management cited revenue initiatives, rate and reimbursement increases, physician recruitment and cost management as contributors to continuing-operations growth. It also noted opportunities to improve local access and operational efficiency.
- Healthcare reform may expand insured coverage and reduce uncollectible accounts, but could also reduce Medicare and Medicaid reimbursement and increase employee benefit costs. CHS said the effects remained uncertain.
- Material risks include substantial debt and covenant requirements, interest-rate exposure, reimbursement and payer-contract changes, self-pay collection risk, labor and supply cost inflation, and the effects of acquisitions and integration. A 1% change in estimated contractual reimbursement percentages could change quarterly net income by approximately $33.1 million; a 1% change in estimated collection percentages could change it by approximately $17.5 million.
- Government investigations and litigation present significant uncertainty. Subsequent to quarter-end, CHS disclosed an HHS OIG subpoena concerning emergency-department processes and billing, and a DOJ-coordinated investigation of alleged inpatient billing practices, including a national audit of certain Medicare claims. CHS said it was cooperating and could not predict outcomes. Tenet also sued CHS in connection with its proposed acquisition; CHS moved to dismiss. The filing reports no estimable loss range for certain legal matters.
- CHS’s $6-per-share cash offer for Tenet, announced April 18, 2011, was rejected April 22. CHS said it would continue to pursue its stated position; the transaction remained unresolved at filing.
- Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and hospital volume trends persist, particularly given the 3.4% same-store admissions decline and the contribution from acquisitions.
- Whether operating costs, bad debts and self-pay exposure affect margins and cash conversion; verify the drivers of the sharp year-over-year operating cash-flow decline.
- Debt maturities, interest expense, covenant headroom, and actual usable revolver availability after letters of credit and other restrictions.
- Developments and potential financial, operational or regulatory consequences of the consolidated government billing investigations, related lawsuits and other disclosed proceedings.
- Progress and costs associated with the hospital held for sale, replacement-hospital construction commitments, and the unresolved Tenet proposal.
- The timing and net effect of healthcare reform and Medicare and Medicaid reimbursement changes.